Tuesday, May 19, 2009

TJX Constant currency Dilemna

The TJX Companies Inc (TJX) reported encouraging results for a retailer in a dismal economy. Kudo’s to management on many issues. But the foreign exchange issue remains too cloudy and not properly understood by investors. TJX is a large global company buying goods everywhere and selling goods around the world. Foreign exchange is critical and if not managed correctly can wipe out profits overnight. So read this quote from the earnings release.

Additionally, the Company routinely enters into inventory-related hedging instruments to mitigate the impact of foreign exchange on merchandise margins when the Company’s international divisions purchase goods from U.S. sources. For accounting purposes, there is a mark-to-market adjustment on the hedging instruments at the end of each quarter. While these adjustments occur every quarter, they are of much greater magnitude when there is significant volatility in currency exchange rates.”

Carol Meyrowitz, President and Chief Executive Officer of The TJX Companies, Inc. had started the press release buy saying that he was pleased with the quarter. So the question becomes is the hedging program working. FX rates fluctuate; we all know that. They claim the hedge program is focused on the merchandise margins. Interesting use of words. Are you not hedging the entire exposure of your obligations? Once the hedge is in place they revalue quarterly on a mark to market basis. But what about the transaction that was hedged in the first place? Would it not make sense to mark it to market also? The point of a hedge is to be neutral and eliminate any additional risks. Also if the company is settling accounts on a monthly basis how long do the hedges go on for?

The press release went on at great lengths to describe the FX hedge program but really does not allow the investor to analyze its effectiveness. Hedge instrument make the market nervous. These guy’s are retailers; do they have the skill set to manage this risk? Given that they are not properly explaining the risk leads one to wonder if they have this one covered. They claim to have a link that provides a table of explanation. The link is to the front page of their corporate web site not to the specific information they claim to be providing.

The company as previously announced is now reporting on a constant currency basis. This assumes that currencies stay constant. We all know that currencies fluctuate. If you have significant global operations you will have foreign exchange risk. Therefore this concept of constant currency only serves to mask the risk. When do you adjust the books to reflect the realities of fluctuating currencies.